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Cheesecake Stays Neutral

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We maintain our Neutral recommendation on restaurants chain The Cheesecake Factory Inc. (CAKE - Free Report) . While we prefer the company’s efforts to expand beyond US, its relatively favorable food cost outlook and solid return to shareholders, a sluggish performance in fourth-quarter 2012 keeps us on the sidelines at the current level.

Why the Reiteration?
Cheesecake, which operates three brands namely The Cheesecake Factory Restaurant, Grand Lux Café and RockSugar Pan Asian, is well positioned to sustain its same-stores sales growth driven by improved guest traffic. Management expects 2013 to be strong, marking the fourth year of consistent increases in comparable restaurant sales. The company is also on its way to attain historically high margin levels in 2013.

Cheesecake also remains steadfast in its goal to expand beyond the U.S. It opened 3 restaurants in the Middle East under a license agreement in 2012. Two more units abroad are in the offing for the company in 2013.  The company is all set to foray into Mexico, Chile and four other Latin American countries namely Argentina, Brazil, Colombia and Peru by 2021. Management expects solid return from international growth as evident from the higher-than-expected volume growth at the three Middle East units.

However, the company performed sluggishly in the fourth quarter of 2012 with both earnings and revenues declining year-over-year and missing the Zacks Consensus Estimate. Same-store sales growth was muted in the quarter. Operating margin in the fourth quarter shrank 190 basis points (bps) mainly due to reduced revenues overshadowing the benign cost structure.

Management is not very hopeful even on comparable store sales growth in the upcoming first quarter due to the temporary shutdown of the restaurant in Hawaii owing to a fire and the adverse impact of the storm that hit the Northeast in early February this year.

Hence, at the current level, we remain cautious and prefer to take a wait and see approach till the additional locations scheduled to open in 2013 and international expansion begin to contribute nicely to 2013 margins.

Other Stocks to Consider

Some other restaurant industry stocks with a favorable Zacks Rank include Red Robin Gourmet Burgers Inc. (RRGB - Free Report) , Burger King Worldwide Inc. and Cracker Barrel Old Country Store Inc. (CBRL - Free Report) . While Red Robin and Cracker Barrel retain a Zacks Rank #1 (Strong Buy), Burger King carries a Zacks Rank #2 (Buy).

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